American United Logistics v. Catellus Dev. Corp.

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Williams
• Citation: American United Logistics v. Catellus Dev. Corp., 319 F.3d 921 (7th Cir. 2003)
• Decision Date: 12 February 2003
• Docket Number: No. 01-1711.,No. 01-2310.,01-1711.,01-2310.
• Parties: AMERICAN UNITED LOGISTICS, INC. and CENTRAL AMERICAN WAREHOUSING CO., INC., Third-Party Plaintiffs-Appellants, v. CATELLUS DEVELOPMENT CORPORATION, et al., Third-Party Defendants-Appellees. Nabisco, Inc., Plaintiff-Appellant, v. American United Logistics, Inc., et al., Defendants-Appellees.

319 F.3d 921

AMERICAN UNITED LOGISTICS, INC. and CENTRAL AMERICAN WAREHOUSING CO., INC., Third-Party Plaintiffs-Appellants, v. CATELLUS DEVELOPMENT CORPORATION, et al., Third-Party Defendants-Appellees.

Nabisco, Inc., Plaintiff-Appellant, v. American United Logistics, Inc., et al., Defendants-Appellees.

No. 01-1711.

No. 01-2310.

United States Court of Appeals, Seventh Circuit.

Argued January 25, 2002.

Decided February 12, 2003.

As Amended on Denial of Rehearing April 3, 2003.

COPYRIGHT MATERIAL OMITTED

Erin Elaine Kelly (Argued), Sidley Austin Brown & Wood, Chicago, IL, For Nabisco, Inc.

Howard L. Lieber (argued), Horvath & Lieber, Chicago, IL, for American United Logistics, Inc. and Central American Warehouse Co., Inc.

James N. Nowacki (argued), Kirkland & Ellis, Chicago, IL, for Catellus Development Corp.

Alan R. Dolinko, Chuhak & Tecson, Chicago, IL, for Krusinski Const. Co.

Randall G. Talan (argued), Menges & Molzahn, Chicago, IL, for Brandonisio Const. Corp.

Robert A. Shipley (argued), Franklin & Shipley, Chicago, IL, for Artlow Systems.

Michael Resis (argued), O'Hagan, Smith & Amundsen, Chicago, IL, for G.A. Blocker Grading Contractor, Inc.

Before MANION, KANNE, and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

A warehouse that Nabisco, Inc. leased to store its products contained chemical residues which contaminated its packaged food products, and it sought to recover the replacement costs of those products. Nabisco sued those involved in the warehouse lease, construction, and floor finishing process, alleging that their negligence and breach of their duties to warn allowed chemicals to damage its property. American United Logistics ("AUL"), Nabisco's warehouse partner, and Central American Warehousing, AUL's affiliate, also filed suit against the property developer, contractor, and subcontractors, claiming breach of warranty and contract. The district court dismissed Nabisco's negligence and breach of duty to warn claims, finding that the economic loss doctrine barred tort recovery. Additionally, the court dismissed Central and AUL's claims, ruling that they did not have a right to enforce warranties issued by the property developer, contractor, and subcontractors. We affirm the judgment against Nabisco, reverse the judgments against Central and remand for further proceedings, and reverse in part and affirm in part the judgments against AUL and remand for further proceedings.

I. BACKGROUND

A. The Facts

Nabisco and AUL were warehousing partners for Nabisco's snack food products. Nabisco asked that AUL find additional warehouse space for snack food products, and they signed a "Public Warehouse Storage, Handling and Inventory Agreement" ("warehouse agreement"). Under the warehouse agreement, AUL agreed to provide warehouse space and other services for the storage and handling of Nabisco's bakery products. In addition, the warehouse agreement specifically required AUL to keep poisonous, dangerous chemicals and foul odors in a separate part of the warehouse.

AUL contacted Catellus Construction Corporation to find available warehouse space in Illinois. AUL told Catellus that the warehouse was for Nabisco and that it must be suitable for the storage of retail food products. According to the parties, Catellus expressed reservations about entering into the contract with AUL because AUL had only been in existence for a short time, and Catellus preferred to contract with AUL's affiliate, Central. Consequently, Catellus and Central signed a Single Tenant Industrial Lease (the "tenant lease") for warehouse space that Catellus already had under construction. Eight months earlier, Catellus had hired Krusinski Construction as the warehouse contractor. Krusinski in turn hired G.A. Blocker Grading Contractor, Inc. to excavate the subgrade underneath the concrete warehouse floor and Brandonisio Construction Corporation to prepare the concrete floor.

According to its contract with Krusinski, Brandonisio was supposed to use a finishing product known as Sonisil on the floor; instead Brandonisio used Cure & Seal, a different finishing product manufactured by Specco. Cure & Seal contains aromatic hydrocarbons, which are airborne chemicals that have a fragrance, odor, perfume, or scent. As a result of this error, Krusinski contracted with Artlow Systems, Division of Archem, Inc. to strip the floor and fix the sealant problems, but Krusinski failed to specify the stripping agent to be used to remove the finish. Artlow used a product called Arsolv, manufactured by Hydrite Chemical Company, to strip the floor, which also contains aromatic hydrocarbons.

Shortly after the floor finishing process was complete, Nabisco began using the warehouse. A month later, Nabisco began receiving complaints from customers regarding a chemical odor and flavor in certain snack food products such as Chips Ahoy and Oreo cookies. Nabisco investigated and learned that the complaints were all related to products that had passed through the Illinois warehouse. Test results indicated that all Nabisco products stored in the warehouse that were wrapped in polypropylene were contaminated with aromatic hydrocarbons. The contamination made them unfit for sale but did not pose a health risk. These actions followed.

B. District Court Proceedings

1. Nabisco's claims.

Nabisco sued AUL, Central, Catellus, Krusinski, Brandonisio, and Artlow, alleging negligence. In addition, Nabisco sued Specco and Hydrite claiming a breach of their duty to warn users of the effect of their products on polypropylene-packaged food products. Nabisco alleges that chemical emissions from the finishing products infiltrated its polypropylene-wrapped packaged goods as soon as these products entered the warehouse. Nabisco supports this argument by submitting evidence that no matter how long its products were in the warehouse, they were all contaminated by aromatic hydrocarbons. Furthermore, Nabisco proffers the testimony of experts who concluded that contamination occurred immediately. Nabisco seeks $30 million for the costs incurred as a result of the contamination, including the cost of testing the warehouse and recalling and destroying contaminated products.

In May 2000, Magistrate Judge Ashman recommended that Nabisco's negligence and duty to warn claims be dismissed, holding that Nabisco's claims were actually contractual disputes barred by the economic loss doctrine. District Judge Bucklo adopted the magistrate judge's findings and ruled that the contamination of Nabisco's products was not a "sudden or calamitous" occurrence, and thus not exempt from the economic loss doctrine. The district court granted Nabisco leave to file its fourth amended complaint, but denied Nabisco's attempt to allege new facts to support its negligence claims.¹

2. Central and AUL's claims.

In response to Nabisco's fourth amended complaint, Central filed suit against Krusinski, Brandonisio, Artlow, and Blocker for breach of warranty. Central maintains that Catellus assigned its rights to enforce any warranties arising out of the construction contracts to Central. AUL, Central's affiliate, also filed a third-party complaint against Catellus. Relying on prior negotiations and the tenant lease between Central and Catellus, AUL alleged that it was a direct third-party beneficiary of the tenant lease and had the same rights as Central under the lease. Additionally, AUL brought claims against Krusinski, Brandonisio, Artlow, and Blocker, asserting that it had a right to recover damages as Nabisco's bailee. The defendants sued by AUL and Central moved to dismiss those claims, asserting various defenses, including lack of standing. Judge Bucklo granted the defendants' motions to dismiss the complaints of AUL and Central and denied AUL leave to amend.

AUL and Central jointly filed a motion seeking clarification of the judgment. In response to this motion for clarification, the district court reinstated Central's claim against Blocker, the excavation contractor, and issued its final judgment against AUL and Central with respect to all claims except Blocker's. Nabisco, AUL, and Central timely appealed.

II. ANALYSIS

When reviewing claims dismissed pursuant to Rule 12(b)(6), we ask whether the plaintiffs can prove any set of facts supporting their claims that would entitle them to relief. We accept all the well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in favor of the nonmoving parties. See Albany Bank & Trust Co. v. Exxon Mobil Corp., 310 F.3d 969, 971 (7th Cir.2002). Our review of the district court's decision to grant a motion to dismiss under Rule 12(b)(6) is de novo. Id. We review the court's denial of leave to amend complaints for an abuse of discretion. See J.D. Marshall Int'l, Inc. v. Redstart, Inc., 935 F.2d 815, 819 (7th Cir.1991).

A. Nabisco's Tort Claims²

1. Negligence and the economic loss doctrine.

The economic loss doctrine denies a tort remedy for product defects when the loss "is rooted in disappointed contractual or commercial expectations." See Mutual Serv. Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 615 (7th Cir.2001) (quoting Collins v. Reynard, 154 Ill.2d 48, 180 Ill.Dec. 672, 607 N.E.2d 1185, 1188 (1992) (Miller, C.J., concurring)). Contract law provides the proper remedy for disappointed commercial expectations, such as when a product is unfit for its intended use. See Moorman Mfg. Co. v. Nat'l Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443, 450 (1982). Recovery in tort for disappointed commercial expectations due to breach of implied duties and warranties between non-contracting parties is also barred by the economic loss doctrine. See Redarowicz v. Ohlendorf, 92 Ill.2d 171, 65 Ill.Dec. 411, 441 N.E.2d 324, 327 (1982); Moorman, 61 Ill.Dec. 746, 435 N.E.2d at 450. To recover in tort under the economic loss doctrine, a party must show harm above and beyond a party's contractual or commercial...